Systems of Accounting, Basis of accounting (Cash Basis & Accrual Basis). Difference between Accrual Basis of Accounting and Cash Basis of Accounting.
Cash Basis of accounting:Cash Basis of Accounting is a method of recording transactions by which revenues, costs, assets and liabilities are reflected in the accounts for the period in which actual receipts or actual payments are made. It is a system in which accounting entries are made only when cash is received or paid. No entry is made when a payment or receipt is merely due. In other words, it is a system of accounting in which revenues and costs and assets and liabilities are reflected in the accounts in the period in which actual payments or actual receipts are made in cash.
Accrual System of Accounting:
- Revenue is recognized as it is earned irrespective of whether cash is received or not;
- Costs are matched against revenues on the basis of relevant time period to determine periodic income, and
- Costs which are not charged to income are carried forward and are kept under continuous review. Any cost that appears to have lost its utility or its power to generate future revenue is written off as a loss.
Difference between Accrual Basis of Accounting and Cash Basis of Accounting
|Basis of Distinction||Accrual Basis of Accounting||Cash Basis of Accounting|
|Prepaid/Outstanding Expenses / accrued/ unaccrued Income in Balance Sheet.||Under this, there may be prepaid/ outstanding expenses and accrued/ unaccrued incomes in the Balance Sheet.||Under this, there is no prepaid /outstanding expenses or accrued /unaccrued incomes|
|Higher/lower Income in case of prepaid expenses and accrued income||Income Statement will show a relatively higher income||Income Statement will show lower income.|
|Higher/lower income in case of outstanding expenses and unaccrued income||Income Statement will show a relatively lower income.||Income Statement will show higher income.|
|Availability of options to an accountant to manipulate the accounts by way of choosing the most suitable method out of several alternative methods of accounting e.g. FIFO/LIFO/SLM/WDV||Under this, an accountant has options.||Under this an accountant has no option to make a choice as such.|